Romania and the Lisbon Agenda

07/11/2005

It will be some time before Romania is genuinely in a position to embark on the ambitious goals of the Lisbon Agenda, which sets out to transform the EU into a knowledge-based economy that will be the "most dynamic and competitive" in the world. Faced with more immediate challenges and priorities, Romania is far from achieving such broad long-term goals. Nevertheless, argues economist and former Finance Minister Daniel Daianu, the effort needs to be undertaken -- though in a form that fits the specifics of the Romanian economy.

By Daniel Daianu for Southeast European Times in Bucharest – 07/11/05

A new report uses structural indicators to assess the Romanian economy and examines the links between policies and the economic recovery and growth. [EU]

A third independent report assessing Romania's economic performance in terms of the Lisbon Agenda benchmarks was recently released. It follows up on a November 2004 study, which focused on competitiveness and ways of increasing convergence with EU standards, and an initial analysis in March 2004, which featured a scorecard based on the main objectives set out in the Agenda.

The new report has been undertaken against the background of the revised Agenda; it uses structural indicators in order to assess the Romanian economy comparatively and examines the linkage between policies and the economic recovery/growth of recent years, the challenge of competitiveness in the local context, and the ability of Romanian policy-makers to foster job creation as a means to mitigate migration.

Broadly speaking, the Lisbon Agenda is an ambitious policy programme meant to combat the low productivity and economic stagnation witnessed in the EU, which has found itself lagging behind the United States and, increasingly, emerging Asian economies. The stated goal is to turn the EU into "the world's most dynamic and competitive economy" by 2010. The programme places a special emphasis on building an information society through computer literacy, technological innovation, and the development of IT-related businesses.

The Lisbon Agenda functions both as an overarching vision and a complex set of policy guidelines. Its priorities can be interpreted by EU member and accession countries differently, national performances and circumstances vary significantly. While the older EU member states are especially focused on job creation and support for R&D as well as reform of the welfare state, for a candidate country like Romania the main priorities are economic restructuring and improvement of the business environment. Although information and communication technologies can sometimes work wonders, development stages cannot simply be leapt over at will. For Romania and other nations in transition, technology absorption will remain essential the foreseeable future.

Embarking on the grand aims set out in the Lisbon agenda may seem a luxury for Romania's emerging economy. Such economies, as is commonly known, rely mainly on the absorption of available modern technologies in their quest to achieve rapid economic growth. Although substantial economic progress has been achieved in recent years (prompting Fitch and S&P to give Romania its first investment grade ever) the structural foundations of the Romanian economy are not sufficiently strong. Moreover, the local financial intermediation is inadequately developed, agriculture remains behind the times, and external deficits have been growing sharply. Under these circumstances, moving towards a knowledge-based economy is a pretty daring endeavour.

The revised Lisbon Agenda focuses on computer literacy, technological innovation and the development of IT-related businesses. [File]

In fact, Romania has a long way to go to reach the goals set forth in the Lisbon Agenda. Although progress has been made, it is not even close to approximating the 25 current EU members' performances in most areas. In no small part, this is because Romania has different priorities and challenges.

The good news is that knowledge diffusion -- that is, the spread of an information technology -- is advancing at a good pace, although knowledge creation indicators are still underperforming. The emergence of software firms signals there is movement in the right direction. The key to longer term growth, however, is the production of higher value-added products and services, and this will require a sustained focus on education, the building up of skills, and expansion of technological knowhow -- keeping up with the latest information and communication technologies.

The new report includes a number of policy recommendations for boosting Romania's progress towards the Lisbon goals. Of the greatest urgency is strengthening the country's capacity to absorb EU funds; one way would be through establishing a special vehicle, such as a Corporation for Infrastructure Development. Public expenditure should be overhauled, redirecting funds towards areas that strengthen the country's human capital infrastructure and administrative capacity. Multi-annual budget programming is a must.

Certainly the road to a knowledge society will not be easy unless the current decline in R&D spending is reversed. The report advocates directing more state aid towards R&D objectives and providing support for businesses to conduct R&D. For example, fiscal incentives could be linked to the share of R&D expenditures in turnover or the share of R&D employees in total employees, or the number of patents registered each year.

Specific Lisbon-related goals also have to be seen within the context of larger policy problems affecting the entire economy. For example, Romania needs a vigorous competition policy to prevent market abuse. The tax base should be broadened and tax collection improved in order to avoid "budget shock" at the time of EU entry. Excessive appreciation of the domestic currency should be prevented through direct inflation targeting. Non-wage components for labour costs should be reduced, especially for low-skill jobs, hiring and firing costs should be reduced, and the Labour Code further improved. Lifelong learning should be encouraged.

Romania's performance should be judged realistically. It will be some time before the country is genuinely in a position to embark on creating a fully-fledged "knowledge economy" or tackle the other long-term Lisbon goals. Nevertheless, the effort needs to be undertaken, though in a form that fits the specifics of the Romanian economy. The reasons are clear. Firstly, the Lisbon Agenda ranks very high on the list of priorities of the club which Romania will soon join, the EU. Secondly, working towards the long-term vision will spur the country to make needed upgrades to products and services, in turn facilitating growth in all areas. The seeds of change have to be sown starting now.